Job Gaps In Mortgage Qualification Lending Guidelines

Job Gaps In Mortgage Qualification Lending Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Job Gaps In Mortgage Qualification Lending Guidelines

If someone wants to apply for a mortgage, there are certain requirements.

Credit and income play are two of the many factors mortgage underwriters will scrutinize when underwriting a mortgage loan applicant. Lenders require a tri-merger credit report on all new mortgage loan applicants. A tri-merger credit report is a credit pull from each of the three major credit bureaus. Most creditors such as auto finance companies, credit card companies, and banks will just pull one credit report from one of the three credit bureaus when determining the loan applicant’s credit profile. However, since there is a lot of risk with mortgages, lenders do not want to take a chance and make sure they analyze and review each of the three credit bureaus. The median size of a mortgage on an average 3 bedroom, 2 bathroom 1,700 square foot single-family home is $342,250. Mortgages are big-ticket items with small profit margins if the borrower defaults and/or forecloses on a home loan. Therefore, lenders need to be careful when they are processing and underwriting borrowers. The ability to repay is determined by income and the borrower’s credit payment history. The borrower’s payment history from the credit report will determine the borrower’s history on how he or she pays their monthly debt obligations over the years. The borrower’s income determines the means of the borrower in paying their new mortgage payments. Mortgage underwriters want to make sure the borrower’s current job is stable, strong, and likely to continue for the next three years. This is the main objective and focus when mortgage underwriters process borrowers with gaps in employment in the past two years. Gaps in employment are allowed in the past two-years. However, there are rules and regulations on employment gaps when borrowers are qualifying for a mortgage.

How Mortgage Underwriters Determine The Financial Stability Of Borrowers

How Mortgage Underwriters Determine The Financial Stability Of Borrowers

Income and employment are one of the most important factors on the eligibility of mortgage loan applicants when mortgage underwriters are processing and underwriting the file.

  • Gaps in employment are allowed in the past two years
  • However, mortgage underwriters want to know and feel confident the new job of the borrower is strong, stable, and likely to continue for the next three years
  • Mortgage underwriters have a lot of underwriter discretion when it comes to gaps in employment

The following are also important factors for underwriters when qualifying borrowers:

  • Need to meet minimum credit score requirements
  • Mortgage underwriters will look at the borrower’s payment history for the past few years
  • Late payments in the past 12 months are normally deal killers unless the borrower has a good letter of explanation with extenuating circumstances
  • Late payments after bankruptcy and/or foreclosure are really frowned upon by mortgage underwriters
  • Need a job with consistent income
  • Need assets to cover down payment and/or closing costs
  • Need to have a timely payment history in the past 12 months
  • Mortgage borrowers can qualify for a home loan with judgments and tax liens but only with payment agreements
  • However, a written payment agreement with the judgment creditor and/or IRS needs to be executed and three months of payments need to be made to the judgment creditor and/or the IRS on a tax lien
  • HUD, the parent of FHA allow written payment agreements on tax lien but the borrower needs to make three months of monthly timely payments
  • Fannie Mae and Freddie Mac do not allow borrowers with tax liens to be eligible to qualify on conventional loans
  • Borrowers with outstanding tax debts with a written payment agreement can qualify for conventional loans
  • One monthly payment prior to closing needs to be made per written payment agreement in order to qualify for conventional loans with outstanding tax debts

Ability To Repay Mortgage

One of the most important factors lenders want to see is the borrower’s ability to pay their future mortgage payments on a timely basis.

The way they deriver this probability is how long the mortgage applicant has been at their current job and historical salary pattern. Most lenders view if borrowers have been at the same place of employment with consistent income for the past two years, that proves job and income stability. The longer a worker has been in a particular field and job the more stability it shows under the eyes of lenders. Gaps in employment in the past two years are often frowned upon by lenders. However, mortgage guidelines on employment gaps do not disqualify home buyers with gaps in employment in the past two years. The majority of lenders want to see a minimum of two years of full-time employment. There are rules and regulations in determining job gaps in mortgage qualification.

The mortgage underwriter’s main concern with borrowers recently having a new job is the borrowers’ ability to repay their new mortgage. Job stability is very important to lenders.  Mortgage underwriters can exercise underwriter discretion when it comes to the borrower’s employment likelihood for the next three years.

How Underwriters View Job Gaps In Mortgage Qualification

How Underwriters View Job Gaps In Mortgage Qualification

Mortgage loan applicants who are planning on applying for a mortgage loan and had a temporary period of unemployment can still qualify for a mortgage loan. However, the following guidelines need to be followed by borrowers who had gaps in employment:

  • Mortgage loan applicants who were laid off from a job for no longer than six months can qualify for a mortgage loan
  • Will not get penalized for being laid off
  • Need employment offer letter and 30 days paychecks prior to mortgage underwriter issuing a clear to close
  • Borrowers can be on a new job for less than 30 days and still qualify for a mortgage loan
  • This holds true as long have not been laid off longer than six months
  • However, borrowers who have been unemployed for longer than six months need to have at least six months longevity on a new job in order to qualify for a mortgage
  • Any periods of unemployment of greater than six months, there is a six-month new job seasoning requirement

Mortgage loan applicants can be employed in a different industry or field with your new job as long as the salary and/or qualified income is comparable. Borrowers who have longevity in the same job for many years are viewed as having job stability. Borrowers who have a history of consistently getting regular pay increases, bonuses, and promotions are viewed favorably and are considered having compensating factors.  If a borrower has gotten a recent salaried job, the income from the new job stated on their offer employment letter will be used as the qualified income. 30 days of paycheck stubs in the current new job are required prior to the mortgage underwriter being able to issue a clear to close.

Related> Gaps in Employment: 2014 4th Quarter Update

Related> Gaps In Employment

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  1. Hi,

    I’m interested in the FHA jumbo loan program. The purchase price is $750k and I am self employed with some credit late payments but credit is in 600s. I look forward to your response.

    Thank you,
    Julio Rodriguez

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